Small Business Optimism Pulls Back

Small business optimism demonstrated a significant pullback in November on both an outright premise and with respect to desires. While financial experts were forecasting the feature index to come in at a dimension of 107.0, the actual reading was 2.2 points lower, making it the weakest report with respect to desires since April and the biggest m/m decay since March.

After hitting record high levels back in August, the NFIB Small Business Optimism Index has now observed three straight month to month decreases, and like a couple of different pointers, it’s hinting at moving over. With that, we’ve heard and read various remarks proposing that this decrease is another flag that the business cycle might turn.

In our section on “Economic Cycles” for this year’s 2019 outlook report that was published last Friday, we highlighted a number of economic indicators that have had pretty good records historically at anticipating a turn in the business cycle. One indicator that was not included in that section is the NFIB’s Small Business Optimism Index.

The chart below is the same one as above, but we have also overlaid periods of recession with gray shading. From this perspective, it is pretty obvious that there has been very little correlation to peaks in the Small Business Optimism Index and the onset of recessions. In fact, the two times the index peaked at or around similar levels was actually closer to the beginning of an expansion than the end. This is not to say that this indicator is suggesting strength or weakness in the economy going forward, but instead to simply point out that it hasn’t been the best indicator in terms of predicting the business cycle.